IRS Publication 541 — Partnerships

• An organization wholly owned by a state, local, or foreign government.

• An organization specifically required to be taxed as a corporation by the Internal Revenue Code (for example, certain publicly traded partnerships).

• Certain foreign organizations identified in Regulations section 301.7701-2(b)(8).

• A tax-exempt organization.

• A real estate investment trust (REIT).

• An organization classified as a trust under Regulations section 301.7701-4 or otherwise subject to special treatment under the Internal Revenue Code.

• Any other organization that elects to be classified as a corporation by filing Form 8832.

For more information, see the instructions for Form 8832. Limited liability company (LLC). An LLC is an entity formed under state law by filing articles of organization as an LLC. Unlike a partnership, none of the members of an LLC are personally liable for its debts. However, if the LLC is an employer, an LLC member may be liable for employer-related penalties. See Pub. 15, (Circular E), Employer’s Tax Guide, and Pub. 3402, Taxation of Limited Liability Companies. An LLC may be classified for federal income tax purposes as either a partnership, a corporation, or an entity disregarded as an entity separate from its owner by applying the rules in Regulations section 301.7701-3. See Form 8832 and Regulations section 301.7701-3 for more details.

Tip: A domestic LLC with at least two members that doesn’t file Form 8832 is classified as a partnership for federal income tax purposes.

Organizations formed before 1997. An organization formed before 1997 and classified as a partnership under the old rules will generally continue to be classified as a partnership as long as the organization has at least two members and doesn’t elect to be classified as a corporation by filing Form 8832. Community property. Spouses who own a qualified entity (defined below) can choose to classify the entity as a partnership for federal tax purposes by filing the appropriate partnership tax returns. They can choose to classify the entity as a sole proprietorship by filing a Schedule C (Form 1040), Profit or Loss From Business, listing one spouse as the sole proprietor. A change in reporting position will be treated for federal tax purposes as a conversion of the entity. A qualified entity is a business entity that meets all the following requirements.

• The business entity is wholly owned by spouses as community property under the laws of a state, a foreign country, or a possession of the United States.

• No person other than one or both spouses would be considered an owner for federal tax purposes.

• The business entity is not treated as a corporation. For more information about community property, see Pub. 555, Community Property. Pub. 555 discusses the community property laws of Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.